M&A Advisory in Arizona

Arizona maintains a flat 2.5% individual income tax rate for 2025 and 2026 — the lowest flat-rate structure among all income-taxing states — preserved by the trigger mechanism in S.B. 1828. The Arizona PTE election under A.R.S. §43-1014 allows partnerships and S-corporations to elect entity-level taxation at a matching 2.5% rate, creating a fully deductible federal expense that works around the federal SALT cap. For M&A sellers, the PTE election in the year of sale can preserve 30–37% of the state tax outlay as a federal deduction on transaction gains — particularly valuable on ordinary-income components such as §751 hot assets and §1245/1250 recapture.

Arizona allows a 25% subtraction from Arizona gross income for net long-term capital gains from assets acquired after December 31, 2011 (A.R.S. §43-1022(22)), producing an effective LTCG rate of approximately 1.875% for qualifying assets in 2025. Arizona's 2026 SB 1331 expands this subtraction to all long-term capital gains regardless of acquisition date for tax years beginning January 1, 2026, removing the pre-2012 cliff. Sellers holding pre-2012 legacy assets gain materially by deferring a late-2025 close into January 2026. Combined with the flat 2.5% rate, Arizona's all-in effective LTCG rate is among the lowest in the country.

Arizona fully conforms to IRC §1202 for both individual and corporate taxpayers on a static basis (A.R.S. §43-105 and §43-1022(36)), meaning federally excluded QSBS gain is also excluded for Arizona state income tax purposes. Following OBBBA, sellers of post-July 4, 2025 QSBS with 5+ year holdings can exclude up to $15M (or 10x basis) federally and in Arizona. This makes Arizona one of ~35 states that fully honor the federal QSBS exclusion — a meaningful advantage relative to non-conforming California, where QSBS gains are taxed at full 13.3%. Arizona founders in semiconductor tech, aerospace, or healthcare should confirm ADOR static-conformity dates against their acquisition window.

The Arizona SBI election (Form 140-SBI, created by S.B. 1783) allows individual owners to bifurcate qualifying small business income from their regular 140 return and tax it separately at a flat 2.5% for tax year 2025. Qualifying SBI includes Schedule B/C/E/F income, capital gains from business assets, and ordinary pass-through income — especially relevant for owner-operators monetizing in a single year where bunched income might otherwise phase out itemized deductions. Modeling the SBI election vs. regular Form 140 vs. PTE election at the transaction level has routinely delivered 60–120 basis points of incremental after-tax proceeds on middle-market Arizona exits.

Arizona's TPT (statewide 5.6% plus local rates up to ~11.2%) is a gross-receipts tax on the seller's privilege of doing business. A one-time business asset sale typically qualifies as a "casual sale" under A.A.C. R15-5-2001 — exempt from TPT. However, successor liability under A.R.S. §42-1110 makes the ADOR Letter of Good Standing a critical closing deliverable in asset deals: absent clearance (15 business days from tca@azdor.gov), the buyer is liable for the seller's unpaid TPT, withholding, and corporate tax. Prime-contracting TPT classification (65% tax base under A.R.S. §42-5075) is the leading audit-exposure area for construction and semiconductor installation businesses.

Arizona imposes no state estate tax, inheritance tax, or gift tax at any asset level. For founders contemplating pre-exit wealth transfers — grantor trusts, GRATs, sales to IDGTs, or non-grantor trust situs planning — Arizona adds zero state-level friction on top of federal estate and gift tax planning (2026 federal exemption ~$15M per individual under OBBBA). This is a material advantage over estate-tax states such as Washington, Oregon, and New York, and makes Arizona a favored situs for trust-based QSBS stacking and multiplication strategies.